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Palm Buys Handspring

Five years after the founders of Palm, Inc. bolted from the company to form Handspring, Inc., Palm is pulling them back in. Palm has announced that it is acquiring Handspring in a stock swap deal valued at $192 million. In addition, Palm's board of directors gave final approval to spin off its PalmSource subsidiary, which handles Palm OS development and licensing, into a new company. The Handspring purchase will happen after the PalmSource spin-off sometime in the third quarter of 2003, according to Palm.

The merged company, which will be renamed later in the year (PalmSpring, anyone?), retains the three Handspring founders responsible for Palm handhelds: inventor Jeff Hawkins will become Chief Technical Officer, Handspring President and COO Ed Colligan will lead a new smartphone solutions group, and current Handspring CEO Donna Dubinsky will stay with the new company as a member of its board of directors. Todd Bradley, the President and CEO of Palm's Palm Solutions Group (which handles the hardware side of Palm development and sales) will keep his position, while a handheld computing solutions group will be led by Ken Wirt, currently Palm's vice president for sales and marketing.

Although this move comes as a bit of a surprise, given that Handspring was founded because Hawkins and his team felt constrained by Palm (then owned by 3Com), it makes some sense in the current economy. After the launch of the well-received Treo line of phone-enabled handhelds, Handspring hasn't made much noise or significantly updated its product lines (though they have been busy expanding Treo coverage in several international markets). Palm, on the other hand, has finally started to act like the company it promised to be, releasing new handhelds such as the Zire 71 and Tungsten family that do more than just the basics of previous models.

But both companies have faced a sharp decline in the numbers of new handhelds sold. The Palm organizers currently in use provide the basic functionality that most people need: managing addresses and schedules. This is great from the user standpoint, because a device purchased several years ago is still useful, but it's a terrible situation for companies that rely on continued hardware sales to stay alive. That's why the newest handhelds offer color screens, multimedia options, more memory, wireless access, and faster processors.

In that vein, buying Handspring gives Palm immediate access to the burgeoning cellular phone/PDA market (expected to triple in size this year, according to IDC). More important, perhaps, is that Palm gains Handspring's hard-won experience in dealing with cellular phone service providers around the world. The deal also offers additional resources against the growing Microsoft Pocket PC market and puts to rest any talk of Apple buying Handspring, a possibility that would have given Apple an entry into the cell phone and PDA markets.

From the financial perspective, Palm and Handspring estimate that they can save $25 million annually by combining their operations and eliminating overlapping programs and associated real estate, which also includes the loss of about 125 employees. As part of the purchase, Palm agreed to lend Handspring $10 million, which could jump to $20 million if needed, to handle operating expenses while the deal is pending.